Gold, Silver, Metal Prices Commentary for Nov. 19, 2010

The PBOC continued its anti-inflation and anti-bubble battles with yet another hike in the reserve requirements for the country’s banks, effective November 29, this morning.

Coming on the heels of a similar but surprise move just nine days ago, the central bank’s new step constitutes the third such hike since September and will require lenders to up reserves to 18.5%. The announcement sent US equity futures and commodity prices towards lower levels but one day after they tried to recover some of the damage that had been inflicted earlier in the week.

The other front that continued to preoccupy stock and commodity speculators overnight — Ireland — was still presenting an amalgam of indecision in the content of, and delays in the production of any substantive announcement. EU, IMF, and ECB officials continued their talks with their Irish counterparts and although expectations that a reasoned and solution will soon emerge from the meetings lifted the euro ever so slightly (0.3%), the markets are still awaiting to learn how and why the Irish problem might be contained and prevented from infecting the weakest parts of the European debt pyramid (say, Portugal) going forward.

Spot gold bullion dealings opened their final session of the week trending lower despite a relatively flat US dollar (at 78.50 on the index, showing only a 0.03% decline), but with an eye towards the implications of China’s on-going resolve to quarantine and (at least partially) neutralize the inflation bogey. Gold was quoted at $1,348.40 per ounce (a loss of $5.10) as the market opened for what might once again turn out to be a choppy and unpredictable session.

When one has to contend with a market that is primarily driven by the speculative ebb and flow of hot money, such daily developments should offer little in the way of surprises, whatever the direction of prices turn out to be. Fundamentals have been relegated to second-class citizen status amid the conditions that QE actions have engendered for the past two years.

"The extreme liquidity in financial markets recently has caused some commodities (like gold and oil) to inflate far more than fundamentals would support," said Michael Lynch, president of Strategic Energy & Economic Research.

Spot on, Mr. Lynch. QE-related distortions may well be the order of the day for a while longer, but in the medium and longer terms, there is absolutely no way that a particular market’s fundamentals can be ignored. Such lessons have been learned repeatedly — albeit perhaps too late- by many.

Silver was down 23 cents at the start of the Friday New York session, quoted at $26.76 per ounce. The metal surged in Thursday trading, once again showing more range and volatility than its yellow relative. Platinum was down $14 at $1,649.00 while palladium traded $1 lower at $694.00 following yesterday’s gains that eclipsed the rest of the precious metals’ complex in percentage terms. Automaker VW announced that it plans to invest $71 billion in plants and vehicle development over the next half a decade, aiming to surpass auto giant Toyota in sales and profitability.

The German firm, Europe’s largest, has a huge and still growing presence in the Chinese and Indian automotive markets- ones that the rest of the automotive sales world envies at the moment- and ones whose growth has been the…catalyst for impressive gains in noble metals prices in 2009/2010. Certainly, quite a contrasting situation in terms of fundamentals, than the aforementioned ones present in gold and silver.

This is not to say that ETF participation (quite notable in 2010) and a good dose of speculative-oriented hedge fund-originated activity has not been taking place in this small niche. However, the supply/demand balance for the group (Pt/Pd/Rh) offers a much tighter and not necessarily improving set of conditions, while also enjoying a demand pull that does not have the luxury of substituting these vital metals with other, cheaper alternatives.

Meanwhile, there is no substitute for the impact of the words of Ben Bernanke when it comes to the dollar, Treasurys, and such. At a conference organized by the ECB in Frankfurt, Chairman Bernanke said that China’s decision to undervalue its currency has hurt the global economic recovery. Just after the Fed Chief steadfastly defended his institutions’ latest QE accommodation, yields on ten-year notes fell by a full basis point.

Par for the course, this is, as many markets have been making outsized moves in recent months, whether they saw the Fed in easing mode, or are (now) seeing the PBOC in tightening mode. Central bankers, on the other hand, do what they see needing to be done in order to meet their particular objectives and mandates. Market behavior is — to them-collateral ‘fallout’ that eventually fades as the intended consequences of central banks’ actions become manifest and economies get back on ‘track’ (to growth, to lower inflation, or even to higher inflation — as the desired case may be).

The take-home lesson from all this is probably the fact that the window of opportunity to trade/speculate based on ahead of, and following such policy actions is generallynot open-ended and does close — often, way before the crowd is ready to deal with such a paradigm shift.

Mr. Bernanke has had to go on a quasi ‘talk show circuit’ of late, after a plethora of critics turned out to blast his decision to stimulate once again. Many of said critics have never taken a course in much more than ‘Running for Office 101’ but found it proper to lace their critical observations with economic terms they could hardly pronounce. As things stand now, the markets appear to see some success in the anti-Fed rhetoric and are scaling back bets on the size and duration of the latest QE while almost totally dismissing the likelihood of any third easing.

No easing in the CME’s efforts to continue to ask for higher margins in hitherto white-hot commodities (you, know, the ones that have been enjoying the QE party). This morning, the world’s largest futures market raised margins on soybean, lumber, butter, milk oats, and soybean oil futures, and it did so, on the heels of similar tightening moves for contracts offered in gold, silver, cotton, and sugar. European exchanges have also made similar demands upon speculators. Once again, this type of action should come as no surprise, given the orgy of speculation that has been underway in the commodities’ niche.

Speaking of speculation (and nothing but), a totally detailed dissection of the situation of gold bullion backing gold ETFs is available at MineFund.com for your edification.

MineFund writes that "even before the World Gold Council’s benchmark exchange traded gold fund opened for sales it was heaped with several layers of conspiracy mongering. The worst charge is that exchange traded gold really has no bullion underpinning its paper."

Read MineFund’s complete ‘phantom gold’ analysis here and understand that the gold is actually there, that there are no nefarious agents trying to pull the wool over your unsophisticated eyes, and that the procedures (and, most importantly, the results) speak volumes when others speak science fiction to you.